The BackEnd explores the product development process in African tech. We take you into the minds of those who conceived, designed and built the product; highlighting product uniqueness, user behaviour assumptions and challenges during the product cycle.

Yewande issues a standing order for her bank to transfer ₦26,000 (it can vary) to a third party on the 26th of every month. The bank doesn’t have to confirm from her every time whether she really wants the money transferred. Just keep sending it, Yewande says to her bank.

That’s direct debit, a customer-authorised automatically recurring money transfer scheme underpinning today’s digital subscriptions industry. 

Simply put, it is an instruction from you to your bank to make payments when they are due.

One-off payments that don’t need to be made immediately at point of sale can be scheduled on a direct debit system. When Yewande sees a shoe at the mall and immediately pays for it by electronic transfer, and for some reason the transaction is reversed three hours later, that’s a problem but it’s not a direct debit problem.

Direct debit is a cornerstone of modern financial systems. Its application extends beyond banking and insurance, to microsavings apps that automatically debit you if you activate the feature. 

Digital lenders and asset finance companies that deduct scheduled repayments depend on it.

According to guidelines from the Central Bank of Nigeria (CBN), customers will be required to pay either 1% of the value of a failed direct debit or ₦5,000 whichever is greater. 

Issued in December 2019, the CBN’s Guide to Charges by Banks, etc says the charge will only apply to transactions that fail due to the account being unfunded. 

The penalty will be enforced – i.e. your bank will take the fine – whenever the account becomes sufficiently funded again.

On November 19, Stanbic IBTC bank informed customers that the CBN directive will go into effect, and as such customers should “ensure your account is adequately funded at all times to facilitate a successful transaction, especially if you activate any form of direct debit instruction on your account” (emphasis added).

It’s a warning that shouldn’t be taken lightly. It seems reasonable that there should be a penalty for failed direct debits caused by customers not having money in their accounts.

Agreeing to a direct debit mandate and intentionally not fund your account isn’t right.

To solve this problem and prevent adverse effects in the financial system, the question moves to how much the fine should be and whether it suits the offence, and what effect that has on the sanity of the financial system. Considering how revolutionary Direct Debit can be for commerce and innovation. 

To do so adequately, a proper understanding of what direct debit, as a financial technology innovation, entails is necessary; the motivation, contracts, consequences.

‘They will always pay you for me’

Direct debit is the electronic descendant of “debit notes” and paper cheques. 

In Nigeria, debit notes used to be settled by the Nigeria Clearing House infrastructure. With the dawn of electronic payments, management shifted to the Nigeria Inter-Bank Settlement Scheme (NIBSS). 

This process started in 2002 with the introduction of an Automated Clearing House. NIBSS introduced ACH Direct Debit in January 2006.

That period was significant in Nigeria’s cashless policy journey; Interswitch (2001) and eTranzact (2003) were founded, and GSM graced our shores.

Although cheques have declined rapidly in use over the years, direct debit hasn’t necessarily taken off. As these charts from NIBSS show, it has ebbed and flowed:

NIBSS_direct_debit_volume_data
Volume of direct debit transactions have wobbled. Oct 2019 is the peak month. Source: NIBSS

NIBSS_direct_debit_value_data
Value of direct debit transactions have wobbled, but Sept 2020 is the peak month. Source: NIBSS

If direct debit has worked, it’s because commercial entities have lapped up its benefits and gone to task to take advantage.

TV and magazine subscriptions, payment of salaries, private utilities are among the most frequent uses. The pool of use cases isn’t yet large because we are, to be polite, poor. 

But direct debit’s application goes beyond commerce. In fact, it can be argued that governments approve of it because it can be an efficient means of collecting taxes. 

The average Brit has about six direct debit charges, 80% have at least one. The infrastructure underpins the tax collection process. 

This, and the need to respond to technological change, is the context for the CBN’s December guide. 

The direct debit section is a response to “further evolution in the financial industry over the last few years.” according to this

What does that mean?

After using paper cheques for years, it became clear that people were taking advantage of loopholes in how it worked to game analog financial systems. A cheque is a promise – no, a guarantee – of payment from one entity to another, where a bank is invited as the mediator. 

This mediation isn’t without liability; the bank’s integrity is at stake when they don’t fulfil the payer’s request, the bank can be cheated if the payer has no money, and the financial system is vulnerable to a virus.

We responded to this challenge by defining dud cheques as financial fraud. It became a crime to promise and fail when you bring banks into the matter. That’s settled law as this lawyer explains:

“The issuance of a dud cheque is a criminal offence pursuant to Section 1 of the Dishonored Cheques (Offences) Act CAP D11 LFN 2004 and punishable under Section 1 (1) (b) (i) of the same Act.”

It exposed the inefficiency of the paper system, and it’s no surprise to see cheques going out of fashion. 

Again, data from NIBSS:

NIBSS_cheques_data
Volume of cheque transactions have trended downwards since 2017. Source: NIBSS

Enter, direct debits.

It was introduced twenty years ago but we’ve only had like 10 years (when the likes of IrokoTV started digital subscriptions in 2011) to really test it. The CBN feels it’s now a good time to start laying down the law on what is and is not allowed.

The guide includes a focus on sanctions against excess, unapproved, and/or arbitrary charges by banks and non-bank institutions. But the public attention has been drawn to the fine on failed transactions originated by consumers. What is the contention? 

Operation recover all

Who does this fine affect? Stanbic’s email to customers gives an idea: if you activate any form of direct debit instruction on your account.

stanbic_ibtc_bank_direct_debit
Stanbic IBTC’s email to customers on Thursday 19 November, 2020. Source: Twitter 

Should everyone with any kind of recurring digital subscription start fretting ? 

It looks to be the case. And it is worrying because of the other recent powers the CBN has claimed over customer accounts.

If you do not fund this account for a while, and decide to open another (with the same BVN mind you), it is not implausible for the CBN to track you. 

They could do this using GSI – the Global Standing Instruction which went into effect on August 1. 

It’s the CBN’s way of helping banks rein in defaulting borrowers and root out non-performing loans from the system.

GSI is CBN’s very own direct debit scheme which happens to be targeted on defaulting borrowers. By definition, these are customers who “subscribe” for credit and are not making the agreed scheduled payments for the service. 

In this arrangement, CBN is the bank and the commercial banks are the third party service providers. What the CBN can do with a combination of GSI and this direct debit fine mandate starts to resemble a leviathan when you consider that GSI’s loan recovery strategy affects joint account holders.

Which brings us to the question: does this punitive strategy and penalty make sense? Is it fair and pragmatic? Is this the time for it to be implemented?

If the direct debit is for a subscription to a third party’s product or service, if you stop paying, they’ll cancel your subscription and will stop delivering to you. It’s that simple, isn’t it? 

Why is there a need for a penalty from the bank and the financial system if businesses already have ways of taking care of themselves?

Protect everyone, boost enterprise

The first response is that not everybody can in fact take care of themselves, and innovative financial solutions are those that provide cover for the most vulnerable. Consider two instances.

Bola sells refrigerators. He allows customers to pay in monthly installments through direct debit. 

But he has an insurance for himself; an Internet-of-things facility that makes it possible for him to politely lock the user out of the fridge when payment is not made three days after its due. Bola learned this from DSTv, the New York Times and M-Kopa.

It’s an inconvenience for Bola because, like M-Kopa, he can’t recover that physical asset. That fixed cost is gone. He’s not as fortunate as DStv or the Times who sell virtual products. But Bola will move on.

Now, meet Sheriff who sells luxury cushions. He wants to serve high end users. He allows direct debit for five-month installments. But customers have started defaulting after two months. Unlike Bola, IoT can’t help here. He has not set up a secret system of activating pins that come off the wood to cause discomfort to people seated on his product. He’s more vulnerable than Bola.

Should Sheriff not enjoy the advantages of modern finance and ecommerce because his products are not tech? 

Obviously he will engage the police and the courts in recovery after these disappointments but that’s hardly optimal for the ease of doing business. An inclusive financial system will have Sheriff at the core of its thinking.

But the CBN won’t be giving the fine money to business owners, will they?

It doesn’t appear so, and nobody actually thinks this measure is more about boosting commerce than protecting the financial system (though both are connected). 

But as already explained, banks – like the businesses they help receive payments – take up some costs in transactions. 

Consumers employ them to auto-manage their expenditures. The banks “spend” something in that process (the charges are minute and indirectly spread across the customer base). As such, when a payment “bounces” it affects them operationally and comes with a cost.

That framing sounds like drawing an equivalence between failed direct debits and dud cheques, an act that is already definitively frowned upon and punished substantially.

It’s not a stretch, if you agree with the brief history direct debits outlined above. 

But punishments are not a universally accepted method of encouraging good behaviour, not even in parenting. Besides, it would probably be easy to behave well if the entity demanding good behaviour is a moral exemplar. The consensu in Nigeria is that:

‘The government is not trustworthy’ 

Direct debit may be foundational for a modern financial system, but the Nigerian government isn’t to be trusted. It hasn’t earned its stripes.

The CBN is supposed to be an apolitical body but often assumes roles that muddle how people perceive it. It’s become a jack of all trades – restricting forex on milk imports, et al – but monetary policy is anything but world class.

As such, it’s ostensibly independent voice often sounds like a mouthpiece for the partisan authority in charge. Instead of more independence, it’s often wrongly given more powers.

Not surprisingly, the CBN’s enablers are desperate to jumpstart creaking aspects of the Nigerian state. This conflates the primacy of the country’s developmental ambitions  – by whatever means necessary – with habit-formation in a democratic dispensation.

With arbitrary things like automatic stamp duty collection, poorly-conceptualised taxes on POS transactions, and freezing people’s accounts for the flimsiest reasons, there’s little faith overall in the system. The CBN and commercial banks have been complicit in weakening faith in the innovativeness of the financial system. 

A fair solution

Yet, the system has to progress somehow. Small businesses need the advantages of direct debit. High-value consumers need it to ensure they don’t lose track of necessary transactions that have to be made. 

Governments need it to improve efficiency of service delivery (if they ever set that as their primary goal).

So what gives? Two things are necessary: improving technical performance, and working on perception.

The bank must continue insisting on lower transaction failure rates and strengthen dispute resolution. This responsibility falls on individual commercial banks, fintechs and coordinating authorities like NIBSS. 

As long as people feel transactions always fail, they will be highly skeptical of new features that are supposedly for their good. 

The other side of the coin is insisting on an apolitical stance and improving policy communication. A central bank that kowtows to presidential whims that are without sound financial reasoning even to the man on the street is useless. Literally.

With these in play, the matter of how much naira and kobo to be instituted as fines will be less caustic. 1% or ₦5,000 whichever is higher is not really the problem; the audacity of the person asking is.

Meanwhile, it’s a good time to review the services you’re subscribed to. Take this as a time for a paid-subscription detoxing retreat.

Alexander Onukwue | Author

Get the best African tech newsletters in your inbox